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Does broad money matter for interest rate policy?

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  • Brückner, Matthias
  • Schabert, Andreas

Abstract

This paper presents a business cycle model with financial intermediation encompassing the conventional New Keynesian model. Households’ financial wealth comprises cash and interest bearing deposits. When deposits provide transaction services, real broad money, which is predetermined, affects aggregate demand and has a stabilizing impact. Monetary policy can ensure equilibrium uniqueness if the central bank reacts at least slightly on the real broad money gap. Moreover, if the central bank aims at minimizing a standard loss function, real broad money enters the interest rate reaction function. Thus, money matters if it is defined broadly enough to include all households’ financial assets. --

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Bibliographic Info

Paper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 15-2002.

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Date of creation: 2002
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Handle: RePEc:zbw:zeiwps:b152002

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Related research

Keywords: Interest rate policy; real broad money; financial wealth; macroeconomic stability;

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Cited by:
  1. Hafer, R.W. & Jones, Garett, 2008. "Dynamic IS curves with and without money: An international comparison," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 609-616, June.

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